Chapter 12 Investments
ACCUMULATED OTHER COMPREHENSIVE INCOME
The components of accumulated other comprehensive income (loss) (“AOCI”) included in the
accompanying consolidated balance sheets consist of the following:
YEAR ENDED JUNE 30
2016
2015
2014
($ in millions)
Net unrealized investment gains, beginning
of year ……………………………………………………
$ 2.9
$ 13.9
$ 6.1
Unrealized investment gains (losses) ………….
(5.0
)
(18.3
)
13.0
Provision for deferred income taxes ……………..
2.0
7.3
(5.2)
)
Net unrealized investment gains (losses),
end of year ……………………………………………..
(0.1
)
2.9
13.9
CONSOLIDATED STATEMENTS OF CASH FLOWS
YEAR ENDED JUNE 30
2015
2014
($ in millions)
CASH FLOWS FROM INVESTING
ACTIVITIES
Capital expenditures . …………………………………
)
(192.2
)
(180.9
)
Acquisition of businesses, net of
acquired cash …………………………………………..
)
(16.0
)
(180.5
)
Purchases of long-term investments ……………..
—
(15.9
)
Proceeds from disposition of long-term
investments . ……………………………………………
1.9
3.0
NET CASH FLOWS USED FOR
INVESTING ACTIVITIES ……………………
)
(206.3
)
(374.3
)
Investments sold during 2016 originally cost $3.0 million.
142. What was the after-tax realized gain or loss on the sale of available-for-sale securities in 2016?
Assume a 40% tax rate.
143. Assuming a constant tax rate of 40%, what was the pre-tax accumulated unrealized gain or
loss on available-for-sale securities at 7/1/2015?
Chapter 12 Investments
144. Prepare journal entries that Fragrance International recorded at June 30, 2016, to (1) record
any necessary changes to the fair value adjustment for available-for-sale securities and (2)
record any tax effects associated with those changes.
(1)
Net unrealized holding gain/loss—OCI
(2)
Deferred income taxes
145. Bentz Corporation bought and sold several securities during 2016. Listed below is a summary
of the transactions:
February 17
Purchased $102,000 of U.S. Treasury 6% bonds at par plus
accrued interest of $1,000. The security is to be held for short–
term profits.
April 10
Purchased 500 shares of Gauges Inc. common stock at $140 per
share. This security will be held for an unspecified period of time.
August 8
Sold 100 shares of Gauges Inc. for $150 per share.
October 5
Sold half of the U.S. Treasury bonds for $51,500 plus accrued
interest of $300.
Required:
Prepare the journal entries for the above transactions. Show calculations.
Feb. 17
Investment in Treasury bonds
Interest receivable
Apr. 10
Investment in Gauges, Inc.
146. Krogstad Corporation bought 1,000 shares of Cole Inc. for $90 per share plus a brokerage fee
of $1,800. Three months later, the shares were sold for $110 per share. The brokerage fee on
the sale was $2,200.
Required:
(1.) Prepare the appropriate journal entry to record the purchase of the stock.
(2.) Prepare the appropriate journal entry to record the sale of the stock.
(1.)
Investments
(2.)
Cash
147. During 2016, Largent Enterprises purchased stock as follows:
May 17, Purchased 1,000 shares of Nugent common stock for $80 per share.
July 12, Purchased 400 shares of Alfredo common stock at $60 per share, plus a $600
brokerage commission.
Largent accounts for these investments as securities available for sale. At December 31, 2016,
the market values of the securities were as follows:
Security
Market Value per Share
Nugent
$72
Aug. 8
Cash
Oct. 5
Cash
Chapter 12 Investments
Alfredo
$64
Required:
(1.) Prepare the journal entries to record the acquisition of the two investments.
(2.) Prepare any necessary adjusting entries assuming the stocks are both classified as
available for sale securities.
Answer:
(1.)
May 17
Investment in Nugent
Jul. 12
Investment in Alfredo
(2.)
Dec. 31
Net unrealized holding gain/loss—OCI
8,000
8,000
Dec. 31
Fair value adjustment in Alfredo
1,000
1,000
Dec. 31
Net unrealized holding gain/loss—OCI
7,000
7,000
Use the following to answer questions 148–150:
Arctic Cat Inc., the snowmobile manufacturer, reported the following in its 20X5 annual report to
shareholders:
NOTE B – SHORT-TERM INVESTMENTS
Short-term investments consist primarily of a diversified portfolio of municipal bonds and money
market funds and are classified as follows at March 31:
20X5
20X4
Trading securities
$64,433,000
$55,282,000
Available-for-sale debt securities
3,196,000
7,113,000
$67,629,000
$62,395,000
Trading securities consist of $54,608,000 and $41,707,000 invested in various money market funds at
March 31, 20X5 and 20X4, respectively, while the remainder of trading securities and available-for-
sale securities consist primarily of A-rated or higher municipal bond investments. The amortized cost
and fair value of debt securities classified as available-for-sale was $3,105,000 and $3,196,000, at
March 31, 20X5. The unrealized gain on available-for-sale debt securities is reported, net of tax, as a
Chapter 12 Investments
separate component of shareholders’ equity.
Arctic Cat Inc.
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
Years Ended March 31,
Accumulated Other Comprehensive Income changed by the following amounts:
20X4:
Unrealized loss on securities available-
for-sale, net of tax
$(154,000)
20X5:
Unrealized loss on securities available-
for-sale, net of tax
(140,000)
20X5
20X4
Cash flows from
investing activities:
Sale and maturity of
available-for-sale securities
3,703,000
1,729,000
In its 20X4 annual report, Arctic Cat disclosed, “The contractual maturities of available-for-sale debt
securities at March 31, 20X4, are $3,573,000 within one year and $3,340,000 from one year through
five years.”
148. Assume Arctic Cat did not purchase any trading securities during 20X5. Write a journal entry
to record any unrealized holding gains or losses on trading securities during 20X5.
149. How much did Arctic Cat actually receive from the sale of available-for-sale securities during
20X5?
150. What gain or loss would be realized if the available for sale securities on Arctic Cat’s 3/31/X5
balance sheet were sold immediately for their fair value? Show the journal entry that would
record the sale, and show a journal entry to record the effects of the sale on their fair value
adjustment at the end of the period (ignore taxes).
151. Fredo, Inc., purchased 10% of Sonny Enterprises for $1,000,000 on January 1, 2016. Sonny
recognized a total of $400,000 net income during 2016, paid $30,000 of dividends to Fredo
during 2016, and at December 31, 2016, the market value of the Sonny investment increased
to $1,040,000.
Required: Prepare the journal entries necessary to account for the Sonny investment,
assuming that Fredo accounts for that investment as (1) an available-for-sale investment, and
(2) elects the fair-value option.
152. On January 2, 2016, MBH Inc. acquired 30% of the voting common stock of Construction
Corporation as a long-term investment. Data from Construction Corporation’s financial
statements for the year ended December 31, 2016, include the following:
Net income $150,000
Dividends paid $75,000
Required:
Prepare any necessary journal entries for MBH at December 31, 2016, under the equity
method of accounting for investments.
153. On January 1, 2016, American Corporation purchased 25% of the outstanding voting shares of
Short Supplies common stock for $210,000 cash. On that date, Short’s book value and fair
value were both $840,000. The equity method is deemed appropriate for this investment.
Short’s net income reported on December 31, 2016, was $80,000. During 2016, Short also
paid cash dividends in the amount of $24,000.
Required:
Compute the amount that would be reported for the investment on American Corporation’s
financial statements at December 31, 2016.
154. On January 1, 2016, American Corporation purchased 25% of the outstanding voting shares of
Short Supplies common stock for $210,000 cash. On that date, Short’s book value and fair
value were both $840,000. The equity method is deemed appropriate for this investment.
Short’s net income reported on December 31, 2016, was $80,000. During 2016, Short also
paid cash dividends in the amount of $24,000.
Required:
Prepare the journal entries necessary to record the above information on American
Corporation’s books during 2016.
155. On July 1, 2016, Silverwood Company purchased for cash 35% of the voting common stock
of Yellowstone Corporation. Both companies have a December 31 fiscal year-end.
Yellowstone Corporation, which is publicly traded on an organized stock exchange, reported
its net income for the year to Silverwood and paid a dividend to Silverwood during the year.
Required:
How should Silverwood report the above information in its year-end income statement and
balance sheet? Discuss the rationale for your answer.
156. On July 1, 2016, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of
Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding
common stock. The total book value and total fair value of Mountain’s individual net assets on
July 1, 2016, are both $700,000. The total fair value of the 30,000 shares of Mountain’s
common stock on December 31, 2016, is $760,000. Both companies have a January through
December fiscal year. The following data pertains to Mountain Corporation during 2016:
Dividends declared and paid, Jan. 1–Jun. 30
$12,000
Dividends declared and paid, Jul. 1–Dec. 31
$12,000
Net income, January 1–June 30
$14,000
Net income, July 1–December 31
$18,000
Required:
(1.) Prepare the necessary entries for 2016 under the equity method (other than for the
purchase).
(2.) Prepare any necessary entries for 2016 (other than for the purchase) that would be
required if the securities are classified as available for sale.
(1.)
Cash ($12,000 dividends x 20%)
Investment in Mountain ($18,000 NI x 20%)
(2.)
Cash ($12,000 dividends x 20%)
20%)
12,000
157. Matrix, Inc., acquired 25% of Neo Enterprises for $2,000,000 on January 1, 2016. The fair
value and book value of 25% of Neo’s identifiable net assets was $2,000,000 and $1,600,000
on that date, and the difference was attributable to assets that would be depreciated over 10
years. During 2016 Neo recognized net income of $500,000 and paid dividends of $400,000.
Neo had a total fair value of $10,000,000 as of December 31, 2016.
Required:
(1.) Prepare the journal entries necessary to account for the Neo investment, assuming that
Matrix accounts for that investment as an equity method investment
(2.) Prepare the journal entries necessary to account for the Neo investment, assuming that
Matrix elects the fair-value option.
158. Bourne, Inc., acquired 50% of David Webb Enterprises for $5,000,000 on January 1, 2016.
The total fair value and book value of Webb’s identifiable net assets was $8,000,000 on that
date. During 2016 Webb recognized net income of $1,000,000 and paid dividends of
$1,200,000. Webb had a fair value of $11,000,000 as of December 31, 2016.
Required: Determine the amounts that will be associated with the Investment in Webb
account and the Goodwill on Bourne’s balance sheets, assuming Bourne accounts for the
Webb investment under the equity method.
159. Damon, Inc., acquired 25% of Jolie Enterprises for $8,000,000 on October 1, 2016. The total
fair value of Jolie’s identifiable net assets was $27,000,000 on that date, and the total book
value of those net assets was $23,000,000. The difference between fair value and book value
is attributed to equipment that has a remaining useful life of 4 years. During 2016 Jolie
recognized net income of $2,000,000 and paid dividends of $1,200,000 ($300,000 per
quarter). Jolie had a fair value of $36,000,000 as of December 31, 2016.
Required: Assume Damon accounts for the Jolie investment under the equity method.
Indicate the total effect of the Jolie investment on Damon’s:
1) net income for 2016
2) the balance in Damon’s investment account on December 31, 2016.
160. On July 1, 2016, Clearwater Inc. purchased 6,000 shares of the outstanding common stock of
Mountain Corporation at a cost of $140,000. Mountain had 30,000 shares of outstanding
common stock. Assume the total book value and fair value of net assets is $650,000. Both
companies have a January through December fiscal year. The following data pertains to
Mountain Corporation during 2016:
Dividends declared and paid, Jan. 1–June 30
$12,000
Dividends declared and paid, Jul. 1–Dec. 31
$12,000
Net Income, January 1–June 30
$14,000
Net Income, July 1–December 31
$18,000
Required:
(1.) Prepare the entry to record the original investment in Mountain.
(2.) Compute the goodwill (if any) on the acquisition.
(3.) Prepare the necessary entries (other than acquisition) for 2016 under the equity method.
(1.)
Investment in Mountain
(2.)
Purchase price
Fair value of assets purchased
($650,000 x 20%)
(3.)
Cash ($12,000 x 20%)
Investment in Mountain ($18,000 x 20%)
Chapter 12 Investments
161. On January 1, 2015, Bactin Corporation acquired 10% of Oakton Company for $100,000. On
that date, the total book value and fair value of Oakton’s net assets was $900,000. Any
difference between cost and fair value is attributable to goodwill. In 2015, Oakton reported net
income of $60,000 and paid dividends of $30,000. On January 1, 2016, Bactin Corporation
bought another 10% of Oakton for $100,000, and on that date, the book value and fair value of
Oakton’s net assets still was $900,000 (the fair value of Oakton did not change during 2015).
Bactin concluded that its 20% ownership now allowed it to significantly influence Oakton’s
operations. In 2016, Oakton reported net income of $80,000 and paid dividends of $40,000.
Required:
Prepare all journal entries for Bactin for 2015 and 2016, assuming no change in fair value of
the Oakton stock during that time period.
162. LaBelle Corporation owns a $6 million whole life insurance policy on the life of its CEO,
naming LaBelle as beneficiary. The annual premiums are $95,000 and are payable at the
beginning of each year. The cash surrender value of the policy was $56,000 at the beginning
of 2016.
Required:
(1.) Prepare the appropriate 2016 journal entry to record insurance expense and the increase in
the investment, assuming the cash surrender value of the policy increased according to the
contract to $70,000.
(2.) The CEO died at the end of 2016. Prepare the appropriate journal entry.